Blue Sky Laws: A Hidden Danger to Criminal Prosecution

One form of criminal prosecution that has been on the rise throughout the state of Michigan has to do with the famed “Blue Sky Laws” which has consistently presented issues in the white collar sect of criminal prosecution. While the laws were put into place to protect investors, the application of the laws have led to a tremendous amount of confusion. The leader in criminal defense in the State of Michigan is Scott Grabel of Grabel and Associates. One of the ways that Grabel has earned his reputation is through the defense of “White Collar” crimes. Grabel, along with other leaders in the field provided insight on the matter. Let’s build an understanding of the law and then explore the practical application of the statutes in place.

To begin, there are federal requirements to the law. Securities are subject to state registration requirements under state securities laws. In our state we have several registration exemptions for offerings to a limited number of investors which makes the filing of foreign LLC’s in the state of Michigan a dangerous proposition. In some cases, Michigan exemption provisions are preempted by federal law but in many other cases they are not. When asked about the laws, Scott Grabel provided insight on the manner. Grabel was quoted as saying, “There is a danger to the Commerce Clause when we look at the issue of Blue Sky Laws globally. Generically speaking, all securities sold in a particular state must either be registered there or be exempt from registration; and all broker-dealers and their representatives must be registered there or be exempt from registration. The origination of the law causes a great deal of confusion for investors. People seem to think that Justice Joseph McKenna created the term in the famous Hall case but that’s not actually factual (Hall v. Geiger-Jones Co., 214 U.S. 539, [1917]). Without knowing how the term was created makes it almost impossible to see the evolution of the law. When our firm started to defense people charged with a violation of the law, we studied the origins and created case studies from there. The work put in on the front end of the litigation has helped us achieve a great amount of success for our clients.”

Matthew McManus, a partner at Ann Arbor Legal in Ann Arbor, Michigan weighed in on the civil litigation aspect. McManus stated, “Whenever our firm deals with foreign investors, we have a series of questions that have to be addressed, the first being how many investors does the company plan to have. There are a number of limitations that far too often get overlooked. If your client-intake is flawed, your entire representation can lead to harm for your client and a malpractice claim. Diligence is crucial in this regard.”

Ravi Gurumurthy is the founder of Michigan Legal North in Cadillac, Michigan and an Associate for Grabel and Associates. Gurumurthy weighed in on the topic when he stated, “I always find it unique that an attorney will take a case without realizing whom has standing to bring a cause of action. The term “Blue Sky” requires a literal reading of the topic. Case law says it best: “speculative schemes which have no more basis than so many feet of ‘blue sky'”; or, as stated by counsel in another case, “to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.” A Ponzi Scheme is often the intent in the enforcement of “Blue Sky Laws” but we learn that negligence alone can equate to civil litigation and criminal prosecution.” The general issue that we see with the rise of “Blue Sky Laws” is that the prosecution of such will equate to a tremendous amount of money being generated by the state. Whether guilt or innocence is established, there is an influx of economics at play which can make for dangerous criminal prosecution even if there is no mens rea established.

William Amadeo is a partner at the law firm of Ann Arbor Legal in Ann Arbor, Michigan and works as an Associate Attorney for Grabel and Associates. In addition to his legal duties, Amadeo owns and operates BAT Tutoring in Lansing, Michigan with fellow-attorney Ashley Johnson and is a regular contributor to “The Chronicle News” where he works as a journalist. He can be reached at: Williamamadeo@grabellaw.com.